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For-profit college chain ITT sued by federal agency for predatory lending

The Consumer Financial Protection Bureau filed a lawsuit Wednesday against ITT Educational Services Inc., accusing the for-profit college chain of predatory student lending.

CFPB logoThe bureau alleges that ITT exploited its students and pushed them into high-cost private student loans that were likely to end in default. The bureau is seeking restitution for victims, a civil fine, and an injunction against the company.

“ITT marketed itself as improving consumers’ lives but it was really just improving its bottom line,” said Richard Cordray, bureau director. “We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default.”

For-profit colleges benefit when students take out large amounts of loans, regardless of the students’ long-term success, Cordray said.

ITT Educational Services Inc. provides post-secondary technical education. Tens of thousands of students are enrolled online or at one of about 150 institutions in nearly 40 states.

ITT’s tuition costs are among the highest in the country in the for-profit industry, he said. Earning an associate’s degree at ITT can cost more than $44,000. Bachelor’s degree programs can cost $88,000.

That’s significantly higher than the cost of similar degrees at a community college or a public four-year institution, Cordray said.

Most of ITT’s students borrow large sums to pay the high tuition costs and the majority of this money is borrowed from federal student loan programs. But private student loans also provide critical revenue for ITT. Because most ITT students’ federal aid doesn’t cover the full cost of an ITT program, most students face a “tuition gap” requiring them to find other sources of funding.

The bureau’s lawsuit alleges that ITT encouraged new students to enroll at ITT by providing them funding for this tuition gap with a zero-interest loan called “Temporary Credit.” This loan typically had to be paid in full at the end of the student’s first academic year. But ITT knew from the outset that many students wouldn’t be able to repay their Temporary Credit balances or fund their next year’s tuition gap.

The bureau’s lawsuit alleges that between July 2011 and December 2011, ITT pushed its students into repaying their Temporary Credit and funding their second-year tuition gaps through high-cost private student loan programs. Students didn’t know that taking out these high-cost loans would be required to continue their studies.

However, ITT’s CEO revealed in investor information that converting the temporary loans to long-term loans was the company’s “plan all along.”

In Wednesday’s lawsuit, the bureau alleges that ITT:

  • Pressured students into signing up for predatory loans.
  • Offered courses whose credits typically didn’t transfer to local community colleges or other nonprofit schools such as public or private colleges.
  • Mislead students about future job prospects.
  • Knew that most of its students would ultimately default on their private student loans, projecting a default rate of 64 percent.

The lawsuit is the bureau’s first enforcement action against a company in the for-profit college industry.

To assist student loan borrowers who may be in delinquency or default, see the bureau’s Repay Student Debt interactive tool.

The bureau also recently finalized a rule allowing it to supervise certain nonbank servicers of federal and private student loans. The rule takes effect on March 1.

The bureau takes complaints about student loans. Consumers can:

  • Go online to consumerfinance.gov/complaint.
  • Call 855-411-2372.
  • Fax 855-237-2392
  • Mail a letter to: Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa 52244.

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